Debit cards and credit cards offer consumers and merchants alike a great deal of convenience, flexibility and security. However, there are several significant differences between the two types of cards.
What's the Difference Between a Visa Debit Card and a Visa Credit Card?
The main difference between a Visa debit card and a Visa credit card is that a debit card withdraws money from your current bank account balance for any charges made. A credit card is effectively a line of credit.
Debit card charges subtract from your bank account balance. A credit card allows you to borrow money up to your credit limit, and it must be paid back in the future. Cardholders receive monthly credit card bills that tell them how much they owe and impose interest charges and possibly other fees.
Key Differences With Paying Charges
Transactions made with a debit card are immediately charged to your savings account or checking account. The charge will be declined if the funds aren’t available in your checking account or savings account and will create an overdraft. You still run the risk of overdraft fees on your bank account balance if you make a charge on your debit card and then a check is presented to your account for payment but there’s not enough cash left in the account to cover it. The bank may pay the check for you if you have overdraft protection, but you’ll still be charged an overdraft fee.
Credit card charges are charged to a credit account that’s paid back over time, up to the amount of your credit line. You must make at least monthly minimum payments by the due date even if you don’t pay off your entire balance monthly. You’ll be charged late fees if you don’t, although some credit card lenders do offer grace periods. A charge will be declined if it will exceed the credit card’s available credit. Some credit card companies also impose a penalty fee on consumers who try to make such charges.
Requirement for a Credit Check
Debit cards are relatively risk-free for issuing banks because transactions won’t be completed if there aren't sufficient funds in the attached checking account. Customers who qualify to have a checking account usually qualify for a debit card. There’s generally no credit check involved. There’s no annual fee either.
Banks conduct a thorough credit check on credit card applicants because they assume there’s a risk that the customer might not pay their bill. Most banks also charge additional fees for credit cards, such as annual membership fees and penalties for late payments. Credit card issuers sometimes also penalize late-paying customers by increasing the interest rate on any outstanding balance.
What About Prepaid Debit Cards?
Prepaid debit cards are a convenient way to distribute money. They first appeared as gift cards in the U.S. market in the 1970s, and they became popular among employers who started using them as payroll cards for their "unbanked" employees.
There’s no checking account associated with a prepaid debit card because the bank maintains an account with funds that can only be accessed through the card. These accounts can often be replenished, making them an alternative to a checking account. Prepaid debit cards are less strictly regulated than debit or credit cards, however, and prepaid cards are often associated with numerous fees and charges.
When Is a Credit Card Better Than a Debit Card?
The Seattle Credit Union suggests that using your credit card for purchases can be helpful in three circumstances:
- Your credit card lender might offer a rewards program. You can gather up credit card rewards by making qualifying charges.
- You're more protected against theft and fraud with a credit card than with a debit card if your card is lost or stolen.
- Using a credit card can help you build or improve your credit if you promptly pay down your balance each month and avoid making many charges so your credit card debt isn’t increasing. Banks don’t report debit card payments to the credit bureaus.
Which Card Is Less Susceptible to Fraud: Credit or Debit?
The federal government has your back when it comes to fraud protection and liability for fraudulent charges, according to the Michigan Department of Attorney General. Assume someone gets hold of your credit card number and uses it to make purchases online. You most likely won't owe a dime because credit cards offer zero fraud liability provided that you act in time. This is not so if your debit card number is stolen.
The Fair Credit Billing Act gives you 60 days to report fraudulent activity on your credit card, and the most you can be held liable for under some circumstances is $50. The $50 limit applies to debit cards too, but you only have 48 hours to report the fraudulent transaction(s). You'll be liable for $500 if you miss that deadline but report within 60 days. Your liability is 100 percent after that time.
This article was written by PocketSense staff. If you have any questions, please reach out to us on our contact us page.